Open or Closed Funds – Why Can’t We Have the Best of Both?

EG was pleased to announce recently the launch of our new Australian Core Enhanced Fund (ACE).  ACE is the first open-ended fund launched by EG since the group started in 2000, with all prior funds having a closed term of around 10 years.

So why is ACE open-ended? And why the change in structure now?

Closed ended structures have traditionally made good sense for investors who focused on the core-plus and value-added risk/return space. When more uncertainties are at play, a closed structure gives investors the surety that specific market timing opportunities will be maximised, and the fund will be fully capitalised to deploy the agreed repositioning and rezoning strategy. The closed structure also mitigates the risk of liquidity requests during a market downturn, which could disrupt a committed asset strategy and hence, adversely impact fund returns for all investors.

The downside to this closed-end structure is that some investors would prefer to continue to deploy capital to a manager that they trust with a strategy that is performing well, without having to wait until a successor fund is launched.

It is ironic that the traditional tactic to ensure managers consistently deliver strategy, and avoid potential temptation to simply hold passive assets and build funds under management, has now created a barrier to enhancing and embracing successful long-term relationships.

Real estate transaction costs in Australia are high, so if an asset is performing well it may not be in the best interests of the parties to sell just because the fund is reaching its expiry date. Even worse is the risk that an asset may not be optimised before a sale is required to meet a fund term date. Being able to add further equity to an existing fund saves managers and investors time and money in not needing to go through the extensive due diligence and investment process needed for establishment of a new fund.

EG has endeavoured to merge the best of both open and closed structures, avoiding the negative aspects of both.

With ACE we have brought the discipline and controls of a closed-end fund structure into the terms of an open-end fund. ACE has a low base fee with a ‘from inception’ performance fee hurdle, encouraging EG as manager to deliver strong, realised returns over the long term. The strategy is subject to annual review with a full review every 7 years so that, with the agreement of investors, we can pivot the fund to where we see value in the medium to long term. This has already begun with the first ACE acquisition secured last week at 230 Captain Cook Dr, Kurnell. ACE also has liquidity provisions, but this is oriented to allow investors to rebalance their holdings on a regular, even annual, basis contrasting with some funds that only allow redemptions every 5 or 7 years.

So, in the question of what is better, Open or Closed Funds? EG prefers to throw out the rule book and develop a hybrid that meets the investors short- and long-term needs.

EG’s first acquisition in ACE portfolio, 230 Captain Cook Dr, Kurnell, NSW